After strengthening 12 percent against the dollar since the
end of May, the peso has weakened more than 2 percent, the
biggest decline among 16 most traded currencies, according to
data compiled by Bloomberg. X-Trade Brokers Dom Maklerski SA,
the second most-accurate forecaster, says it will
depreciate another 3.9 percent by September and Bank of Nova
Scotia, the third-best, recommends selling the peso.
Futures traders are cutting bullish bets at the fastest rate
since June.

The Bloomberg reporters attribute the recent decline in the
peso to policy uncertainty on the other side of the Mexico-U.S.
border:

The peso is vulnerable because Mexico, which depends
on the U.S. for 80 percent of its exports, will expand 3.6
percent next year, the least since the 2009 recession, as
President-Elect Enrique Pena Nieto takes office, the median of 23
economist estimates compiled by Bloomberg shows. The past month’s
losses surprised investors who bought Mexican assets to take
advantage of the nation’s higher interest rates at a time when
the Federal Reserve was debasing the
dollar.

However, Citi economists think the fundamentals in
Mexico still support peso appreciation going forward:

Balance of Payments’ results for 2Q are truly remarkable.
For a second consecutive quarter, the current account (CA) posted a surplus. Meanwhile, in spite of
capital inflows worth USD22.4billion, the capital account
registered a small USD1.8 billion deficit. From a policy
perspective, determining whether these results are temporary or
the result of structural change is crucial. A structurally lower
CA would be compatible with a stronger real exchange rate, a
lower interest rate, or a combination of both. In the case of the
capital account, the effects of strong capital inflows are eased
when nationals increase their holdings of foreign assets,
however, policymakers face a dilemma when this becomes a
long-term situation, as determining the optimal rate of
absorption is extremely difficult.

Our assessment of the changing external sector suggests
that, independently of its pace, the underlying trend of
peso appreciation vs. the USD should continue. We
conclude that conditions in the CA are clearly supportive of this
trend for now and, in the future, deficits will probably be
smaller than in the past. On the capital account side, we found
some counterbalancing forces that should make the current
capital- exporter position only a temporary phenomenon. In sum,
for the mid-term we see directionality clearly biased in favor of
peso strength. Albeit not our base-case scenario, we consider the
case of sudden peso appreciation vs. the USD. The policy
alternatives in this case would be: a. lower policy rate; b.
discussions about reserve-accumulation policy, and, c. the
possibility of ‘recycling’ via a Sovereign Wealth
Fund.